Analysis: Evaluating Health Board's Performance On Hospital Budgets

The Green Mountain Care Board has now completed its approval process for
the coming year's budgets for Vermont's
14 hospitals. It was the board's first effort and marked the third iteration in
the state's effort to regulate health care costs. The first was the Hospital
Data Council that ran through the 1980s and early 1990s; that morphed into
BISHCA, which first got the power to set budgets in the mid-1990s; and now the
Green Mountain Care Board, which has the same powers as BISHCA, but should have
far greater weight than its predecessor.

So, how did the new board do? Well, it passed, but with something less
than flying colors. Whether that was the result of the fact that the job of
grinding down health care costs is hideously difficult or that the board will
need to get tougher with the hospitals probably won't be known until next year.

The board's challenge was to maintain the downward pressure on costs
generated by the national recession that began in 2008 and continued with the
Vermont Legislature's decision to cap the last two hospital system budgets
first at 4.5 percent in 2011, and then at 4.0 percent in 2012. The Legislature
exempted some increases for particularly desirable items such as moving
stand-alone doctors onto hospital payrolls and for payments such as provider
taxes that hospitals could not avoid.

That amounted to a neck-snapping slowdown from the first decade of the
millennium when the budgets increased by an average of around 10 percent per
year from 2000 to 2009; every hospital in Vermont
more than doubled its budget during that period. By contrast, under the lash of
the Legislature's caps, the inflation rate from 2010 to 2011 was 4.5 percent
and from 2011 to 2012 came in at 4.6 percent.

For the 2013 budgets, the board set a cap of 3.75 percent, with the same
exemptions that prevailed in the previous two years. So, there was considerable
shock all around when the budgets came in at a system inflation rate of 7.2
percent, not as bad as the first decade, but bad enough-more than three times
the underlying rate of inflation in the economy.

The board reacted by calling in several of the higher-spending hospitals
and grilling their presidents and financial officers about every nook and
cranny in the budgets. Just a rough review of the budgets showed that most of
the exemptions claimed were justified, but the overall budgets themselves
looked like they had some vulnerable spending.

Fletcher Allen, which accounts for nearly half of hospital sector
spending in Vermont, wanted to
double its operating margin, from around $21 million to $40 million. The
hospital made a strong case for it, but still, that's a huge jump in just one
year. Southwestern Medical
Center in Bennington
asked for just under an additional $450,000 simply to pay for shifting its physicians
from its own employ to its new partner, Dartmouth Hitchcock in New
Hampshire. Rutland
wanted to fix a big hole in its pension system.

Copley Hospital
in Morrisville wanted to set up a boutique orthopedic practice near Waterbury,
the kind of arms-race effort to grab market share that has helped fuel health
care inflation.

So, what did the board finally do? It cut a total of roughly $800,000
from the $141 million system increase. The total cuts were imposed on two
hospitals, Porter In Middlebury and Copley
Hospital in Morrisville. Both were
straightforward formulaic decisions: both hospitals were hit because even with
the exemptions taken into account, each exceeded the 3.75 percent cap.

And it just wasn't very much money. The system increase still amounted
to 7.1 percent, more than three times the rate of inflation in the overall
economy-an unsustainable rate by anybody's definition. The $800,000 the board
did cut got lost in the rounding off. And the hit on the commercial insurance
companies will sting. The board approved the requested rate increases for every
hospital.

Could the board have done more? Almost certainly. Fletcher Allen
absolutely needs a 4 percent profit margin to maintain a favorable bond rating,
and that is key to its role as the leader in restructuring the whole Vermont
system. But did they need every penny of it in one year? Probably not.

Rutland and Southwest need
to reorganize significantly, but they are still under no direct pressure to
take the unnecessary utilization out of their systems, which has been endemic
in those systems. The board authorized the money to finance the shift of
Southwest physicians to Dartmouth-Hitchcock, but there are no assurances that
that new structure will mean that Southwest will shift to an academic medical
type utilization pattern.

None of this means that the board's job is easy. Every regulatory body
in every state for the past 40 years has failed to significantly constrain the
increase in health care costs. The next one to do so will be the first. And it
could still be the Green Mountain Care Board.

But the board clearly is betting on the "come" as the gamblers might
say. It acquiesced to every piece of the Fletcher Allen budget because it believes,
accurately in my view, that Fletcher Allen is the lynchpin to the restructuring
of the whole system. That goal was advanced last week by the agreement by
Fletcher Allen and Dartmouth to set
up a joint program to manage Medicare patients in the state.

The board also obviously believes that the community hospitals, with the
possible exception of Copley, has gotten the message that they have to shift
from a strategy of building "market share" while playing off Fletcher Allen
against Dartmouth, to a much lower profile of delivering only appropriate care
at affordable rates within their own communities.

Moreover, a big piece of the increase was the shifting of physician
practices, mostly primary care, from outside local hospitals. That costs some
money up front, but the process promises to be highly beneficial, since it
brings many more physicians within the regulatory reach of state government.
And all the evidence so far indicates that Fletcher Allen is fully committed to
restructuring the delivery system, and that the community hospitals are now
prepared to cooperate in that process with both Fletcher Allen and Dartmouth.

Hence
the board's confidence in its decision. Still, a 7.2 increase represents a big
increase in one year. The reason the
question is critical is the absolute requirement that the board maintain its
credibility with all the players in the system. The next year will tell whether
it's justified.